India has more than 28.5 million small and medium enterprises (SMEs), which now have greater opportunities than ever for expansion and diversification. The Indian market is growing rapidly, and entrepreneurs are making remarkable progress in industries such as manufacturing, precision engineering design, food processing, pharmaceuticals, textiles and garments, retail, IT and IT-enabled services, agro and service sectors.
Despite their commendable contribution to the economy, SMEs do not get the support they require from Government departments, banks, financial institutions and corporates. In general, SMEs face the following problems:
Non-availability of suitable technology;
Low production capacity;
Ineffective marketing strategy;
Non-availability of skilled labour at affordable costs.
The Institute of Chartered Accountant of India and the Ministry of Corporate Affairs have done their bit to help SMEs by exempting them from compliance to certain accounting standards, most of which are disclosure standards. The argument behind the move is that it minimises their compliance cost and obviates the need for expertise to implement complex standards. Here is a look at some important exempted standards and their impact on SMEs:
Cash-flow statements (Accounting Standard 3): It is said that ‘cash is king, and profit is opinion’. This standard helps in assessing the cash generated and spent by the enterprise in its operating, investing and financing activities. A grasp of cash generation is important as the owner would need to assess the health of the organisation.
Bankers and potential investors also refer to the cash flow to determine the repaying capacity of the borrower before advancing loans.
Diluted earnings per share (Accounting Standard 20): This is computed by taking into account the potential equity shares — it includes effect of the additional shares which would be issued on conversion of warrants, debentures, preference shares, options, and employee stock option plans. The actual earnings available to the shareholder, for giving effect to the potential shareholder, is crucial to equity shareholders when valuing the company.
Segment reporting (Accounting Standards 16): This standard deals with the revenue, profit, assets and liabilities of a particular segment of the business. A ‘segment’ can be classified by business or geography, depending on the diversification of the enterprise. Segment profitability is important for owners, bankers and investors, as future strategic decisions are based on the profitability and capital requirement.
In addition, SMEs are exempt from the following standards:
Disclosure requirement of Accounting Standard 15 (retirement benefits);
Certain disclosure requirement of Accounting Standard 19 (leases);
Certain disclosure requirement of Accounting Standard 29 (provisions, contingent liabilities and contingent assets).
SMEs do not necessarily remain small, and once they grow into a large organisation the above-mentioned exemptions will cease to apply. Thus, it is better to comply with the standards from the start.
Moreover, bankers and private equity players base their investment decisions on such disclosures, so SMEs should be ready with them.
Non-availability of the information could force them to undertake an elaborate exercise whenever due diligence or negotiations for debt or equity come up.
Hence, while the exemptions given to SMEs may seem like a boon, they could prove to be a bane in the long run.
(Hemant M. Joshi is Partner, and Amar Shah is Manager, Deloitte Haskins & Sells)